Evaluation Of Hawaii’s Renewable Energy Policy And
Evaluation of Hawaii’sRenewable Energy Policyand ProcurementFinal ReportJanuary 2014 Revision
Evaluation of Hawaii’sRenewable Energy Policyand ProcurementFinal ReportJanuary 2014 Revision 2014 Copyright. All Rights Reserved.Energy and Environmental Economics, Inc.101 Montgomery Street, Suite 1600San Francisco, CA 94104415.391.5100www.ethree.com
This material is based upon work supported by the Department of Energy, underAward Number(s) DE-OE0000123.Disclaimer: This report was prepared as an account of work sponsored by anagency of the United States Government. Neither the United States Governmentnor any agency thereof, nor any of their employees, makes any warranty,express or implied, or assumes any legal liability or responsibility for theaccuracy, completeness, or usefulness of any information, apparatus, product, orprocess disclosed, or represents that its use would not infringe privately ownedrights. Reference herein to any specific commercial product, process, or serviceby trade name, trademark, manufacturer, or otherwise does not necessarilyconstitute or imply its endorsement, recommendation, or favoring by the UnitedStates Government or any agency thereof. The views and opinions of authorsexpressed herein do not necessarily state or reflect those of the United StatesGovernment or any agency thereof.
Table of Contents1Executive Summary . 12Cost-Benefit Analysis Methodology . 632.1Overview . 62.2Benefits . 82.2.1Avoided Cost Components . 92.2.2Avoided Cost Scenario Analysis. 242.3PUC Scenarios Developed . 262.4Costs . 302.4.1Utility-Scale Procurement Costs . 312.4.2Feed In Tariff Costs. 312.4.3Net Energy Metering Costs . 31Results .363.1Avoided Cost Components . 363.2HECO Avoided Cost Results . 393.3HELCO Avoided Cost Results. 443.4MECO Avoided Cost Results . 483.5KIUC Avoided Cost Results . 503.6Avoided Cost Conclusions . 533.7Net Cost Comparison . 543.7.1Utility Procurement . 543.7.2Feed-in Tariff . 56
3.7.33.84Net Energy Metering . 59Net Cost Policy Comparison Conclusions . 66Comparison to Alternate Policy Design . 674.14.2Traditional Net Energy Metering Policy . 674.1.1Net Energy Metering in Hawaii . 674.1.2California Net Energy Metering . 68Virtual Net Metering and Community Energy. 704.2.1Community Solar in Hawaii . 704.2.2California Virtual Net Metering . 714.2.3Colorado Community Solar Gardens . 724.2.4Sacramento Municipal Utility District Solar SharesProgram . 744.34.45Feed-In Tariff Policy . 754.3.1Hawaii Feed-In Tariff . 764.3.2California Feed-in tariff . 784.3.3Long Island Power Authority Feed-in Tariff . 80Alternate Policy Design Summary. 80Summary and Conclusions . 81
Executive Summary1 Executive SummaryThe State of Hawaii has ambitious goals for renewable energy development with atarget of 40% of the State’s electricity coming from renewable generation by2030. Under a National Association of Regulatory Commissioners (NARUC) fundedgrant, Energy and Environmental Economics, Inc. (E3) was retained by the HawaiiPublic Utilities Commission (PUC) to develop a methodology and compare theeconomics of different renewable generation procurement options.This study evaluates some of the key renewable policy and procurement optionsin the service territories of Hawaiian Electric Company, Inc. (HECO), HawaiiElectric Light Company, Inc. (HELCO), Maui Electric Company, Limited (MECO),and Kauai Island Utility Cooperative (KIUC). After the completion of this first phaseof study, the PUC will continue to work with E3 to further refine the approach andevaluate potential changes to the existing planning and procurement ofrenewable energy with the goal of reducing costs of renewables to ratepayers inHawaii and / or increasing their value. E3 will provide technical assistance to thePUC in this next phase by updating and improving the modeling and evaluationtools and running stakeholder workshops to incorporate and validate theapproach. 2014 Energy and Environmental Economics, Inc.P a g e 1
Evaluation of Hawaii’s Renewable Energy Policy and ProcurementIn this phase, we develop an economic framework that can consistently compareprocurement options across all the Hawaiian Islands using a transparent andindustry standard approach, and we then perform an assessment of currentrenewable procurement options in Hawaii. The basis for comparison in this studyis net cost (or value) of each renewable procurement option to ratepayers. Thenet cost is calculated as the difference between the cost of renewable purchases,including any associated ratepayer costs for interconnection, integration, anddelivery, and the avoided costs, including displaced conventional power plants,reduced fuel consumption, and other avoided costs. We evaluate the followingprocurement options; utility-scale renewables purchased through competitivebidding, smaller scale renewable energy systems purchased through feed-in-tariff(FIT), and behind the meter renewables ‘purchased’ through net energy metering(NEM).We find that renewable energy provides a significant opportunity for Hawaii toreduce electricity costs to customers. There are many renewable technologytypes that provide net value to ratepayers. These include various sizes of windenergy and solar photovoltaic generation on each island, as well as in-linehydroelectric generation. Given the high costs of purchasing petroleum fuels forenergy on the islands, these approaches can lower utility costs. However, notevery approach to procuring renewable energy and deploying it in Hawaiiprovides net value. We find that biofuel resources are more costly thanconventional generation and other renewable options. We find that customerowned generators that sell energy to the system through NEM tariffs at full retailP a g e 2
Executive Summarycredit impose costs that exceed the avoided costs (the value to the system).However, these findings are based upon currently available information on energyand system costs and it is expected that additional data and improvements to themethodology would further strengthen the analysis. In addition, this initial versionof the analysis excludes certain externalities, equity considerations, and fuel pricevolatility impacts as well as other important regulatory considerations that are noteasily monetized.These findings are based on the current procurement approaches in place inHawaii. In this report we include a review of alternative procurement approachesthat could be considered as a means to further reduce ratepayer costs as the PUCreviews different resource portfolios and reviews policies such as FIT and NEM.Beyond the net value of specific renewable energy types, we find that theportfolio of renewable energy systems is important, and there is value in adiversity of geographic locations and technology types to smooth out theproduction of renewable energy and reduce the volatility on the system. In theanalysis completed in Phase 1, diversity generally reduces variability in theproduction of renewable energy over the course of the year and displaces highercost generation and the need for conventional generation. We suspect thatdiversity will also decrease the costs to integrate renewable energy which could 2014 Energy and Environmental Economics, Inc.P a g e 3
Evaluation of Hawaii’s Renewable Energy Policy and Procurementbe illustrated with more detailed modeling of the operation of the island gridsystems.1As noted above, we recognize that there are more considerations arounddeveloping renewable energy in Hawaii than net cost and that these are notincluded in this study. Additional positive aspects of renewable energy that arenot considered include the financial certainty of renewable purchases andreducing sensitivity to oil price fluctuations, and the positive environmental andquality of life benefits from cleaner air, water, and reduced greenhouse gas (GHG)emissions. Renewable energy also provides more intangible values of energyindependence and sustainability. There are also negative aspects not consideredthat include increased land use and the visibility of renewable energy systems.Finally, there are other considerations such as equity in access to renewableenergy and the distributional impacts amongst those who benefit and those whobear any costs associated with renewables. We believe that all of these issuesshould be considered in the development of renewable energy policy and thedevelopment of specific projects. To the extent possible, these importantelements should be included in future regulatory proceedings in addition to thenet cost approach presented here.1“Implications of Wide-Area Geographic Diversity for Short-Term Variability of Solar Power.” Ryan Wiser andAndrew Mills. LBNL. September 2010. 884e.pdf“Operating Reserves and Variable Generation.” Erik Ela, Michael Milligan, and Brendan Kirby. NREL. August 2011.http://www.nrel.gov/docs/fy11osti/51978.pdfP a g e 4
Executive SummaryIn conclusion, we believe that renewable energy continues to provide a greatopportunity for Hawaii to address its existing and future energy challenges.Through careful planning and procurement of renewable generation that focuseson ratepayer value, Hawaii can both reduce costs and improve the environment.In the report that follows, we provide a detailed description of our methodologyfor developing avoided costs. Then we show the results that support ourconclusions above. Next, the report provides an overview of alternativerenewable procurement approaches from other jurisdictions which is intended toinform future procurement decisions and policy designs in Hawaii. Finally, weprovide conclusions and next steps to improve and refine the tools developed todate and engage stakeholders to consider modifications to renewableprocurement that can decrease costs and increase the value of renewables. Thesemodifications can provide greater ratepayer benefits of renewables to Hawaii. 2014 Energy and Environmental Economics, Inc.P a g e 5
Evaluation of Hawaii’s Renewable Energy Policy and Procurement2 Cost-Benefit AnalysisMethodology2.1 OverviewIn striving to meet Hawaii’s Renewable Portfolio Standards (RPS), it is necessaryfor the PUC to compare various renewable resources on the basis of their overallvalue. A resource’s value can be best determined using net cost or net valueanalysis, which compares the total cost of bringing the resource online (the“procurement cost”) to the total benefits generated by the renewable resource(the “avoided cost”). Cost-benefit analysis is a common decision-making tool inthe electricity industry. E3 has built several spreadsheet models that will allow thePUC to perform such analysis to compare different channels for renewable energyprocurement, as well as different renewable energy technologies.Figure 1. Net Cost CalculationNet Cost or Net Value allows comparison across policy and procurement optionsfor individual projects as well as for long-term planning and portfolioP a g e 6
Cost-Benefit Analysis Methodologycomparisons. This study considers the costs of various renewable energyprocurement mechanisms in place in Hawaii today, including utility-scaleprocurement, the FIT program, and NEM program.The figure above illustrates the broad cost-benefit calculation performed by E3 inthis study. The Net Cost or Net Value of incremental renewable energy isdetermined by calculating the avoided cost and comparing it to the procurementcost. Avoided costs are benefits to the system of displacing conventionalgeneration with new renewable energy, and can include reduced marginal costsof conventional energy, capacity, transmission and distribution deferral,environmental benefits, etc. These benefits will vary based on the hour when therenewable energy is available. The procurement cost of renewable energy (i.e.,the cost of adding the renewable energy to the system) varies by procurementmechanism, but is reflected in recent power purchase agreement (PPA) contractprices, FIT tariff prices, or NEM tariff retail rate credits.In the first step of the analysis, E3 created a spreadsheet model capable ofsimulating hourly energy costs island by island for the years 2013 through 2033.The model can also project other costs associated with conventional energygeneration, including capacity costs and ancillary services (AS). As describedbelow in more detail, the avoided cost model calculates the value to the systemof displacing conventional generation by adding new renewable energygeneration.Next, under direction from the PUC, E3 developed a set of future scenarioswhere different types and amounts of renewable energy generation are added 2014 Energy and Environmental Economics, Inc.P a g e 7
Evaluation of Hawaii’s Renewable Energy Policy and Procurementto each island system. These scenarios do not represent preferred or likelyoutcomes. They are designed to indicate the relative impacts of changes to keyavoided cost drivers. Avoided costs are separately calculated for each scenario.Finally, the avoided costs calculated for each scenario are compared to themarginal cost of different renewable procurement options. This produces theNet Cost or Net Value. For a given procurement mechanism (e.g, utility-scale,FIT, or NEM program), if the costs of procurement are less than the avoidedcosts, then the procurement mechanism produces a net value to the system. Ifthe costs of procurement are higher than the avoided costs, then theprocurement mechanism results in a net cost to the system.The following sections describe how the avoided costs are calculated, whatscenarios were analyzed, and how E3 determined the procurement costs foreach renewable energy procurement mechanism.2.2 BenefitsIn order to determine the benefits of a renewable energy resource, E3 hasconstructed a Hawaii-specific avoided cost model. Avoided costs represent thecost to ratepayers of operating the existing electricity system that is displaced byadding renewable resources to the grid. Since electricity has a different avoidedcost value depending on its time of delivery to the grid, E3’s model creates hourlyavoided costs for a one year period. Hourly avoided costs are a more granular wayto compare renewable resources with very different output profiles, such as windand solar photovoltaic (PV) resources; the time-dependent value of thoseP a g e 8
Cost-Benefit Analysis Methodologyresources is not well captured using average monthly avoided costs. E3’s avoidedcost model is designed to calculate a separate set of avoided costs for four of theHawaiian islands: Oahu, Hawaii, Maui, and Kauai.2.2.1 AVOIDED COST COMPONENTSAvoided cost components for renewable energy projects include energy costs,capacity value, grid support services, reduced financial risk and security risk, andenvironmental and social benefits including improved air and water quality andeconomic development. This report focuses on the components which werequantifiable using existing data and studies. These were largely the grid servicescomponents – energy, capacity and grid services – which represent the bulk of theutility and ratepayer benefits and costs. E3 has developed methodology tocalculate the value in every hour of six components: energy generation, energylosses, AS, system capacity, emissions costs, and transmission and distribution(T&D) deferral. The methodology for calculating each component is described at ahigh level below.Figure 2 Avoided Cost Components Rocky Mountain InstituteComponentDescriptionTreatment in current analysisGeneration EnergyEstimate of hourly wholesale value ofenergyDeveloped via stack models ofgeneration resources by island.Energy LossesThe losses associated with delivery ofenergy from central station generators tocustomers via the T&D system.T&D losses were provided byeach of the utilities.GenerationCapacityThe costs of building new generationcapacity to meet system peak loadsDetermined via resourceadequacy reports and cost offixed operations and 2014 Energy and Environmental Economics, Inc.P a g e 9
Evaluation of Hawaii’s Renewable Energy Policy and Procurementmaintenance (O&M)Ancillary ServicesThe marginal costs of providing systemoperations and reserves for electricitygrid reliabilityBenefit of reduced AS assumed tobe 1% of energy costs. Additionalanalysis required to determineintegration costs specific to eachisland.EnvironmentThe cost of carbon dioxide emissionsassociated with the marginal generatingresourceCurrent analysis assumes 0/tonbut model is capable of usingother valuesT&D DeferralReducing load at some locations canresult in reduced cost of investment forthe utility for upgrades to transmissionand distribution. However, with highpenetrations of renewable generationadditional renewables can requireadditional investments.The current analysis assumes nodeferral value but also noadditional distribution cost as thedata was unavailable todetermine costs and benefits bylocationAnother potentially large component of grid service avoided costs, T&D deferralwas not included as a more detailed study to determine how and if renewablegeneration reduces or increases grid related investments for each utility would benecessary. These grid based avoided costs implicitly value this cost at zero value;assuming neither a net benefit of deferred investment nor a net cost of additionalinvestment. In addition, this version of the analysis does not attempt to quantifythe financial and security risk reduction benefit or the environmental or socialcosts beyond carbon dioxide.2.2.1.1Energy CostThe avoided cost of energy reflects the marginal cost of generation needed tomeet load in each hour. E3’s avoided cost model operates in two different modesto calculate the avoided cost of energy: in the first mode, product
renewable energy with the goal of reducing costs of renewables to ratepayers in . and we then perform an assessment of current renewable procurement options in Hawaii. The basis for comparison in this study is net cost (or value) of each renewable procurement option to ratepayers. . opportunity
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Niihau, Kahoolawe, and Hawaii (often referred to as the “Big Island of Hawaii”). Figure 1 shows Hawaii’s major islands and their relationship to each other in terms of size and location. It also shows the service territories of Hawaii’s four electric utilities. The Hawaiian Electric Company, or HECO, serves the Island of Oahu. HECO has two
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Young integral Z t 0 y sdx s; x;y 2C ([0;1]) Recall theRiemann-Stieltjes integral: Z 1 0 y sdx s B lim jPj!0 X [s;t]2P y s ( x t{z x s}) Cx s;t () Pa finite partition of [0;1] Th
